Types of Business Organisation - an Overview

Types of Business Organisation

Businesses are traditionally divided into:

·  Private sector

·  Public sector

·  Charities which form the voluntary sector.

The Public Sector

This sector comprises government owned or government controlled bodies including:

·  Public corporations such as the Post Office, British Rail and the Bank of England

·  Government Departments

·  Local authorities such as County, Metropolitan or District Councils

The Private Sector

This sector comprises enterprise, which is directly or indirectly in private ownership. This sector accounts for most businesses operation within the UK.
Private sector businesses include:

·  Sole traders (one person businesses)

·  Partnerships (groups of people in business)

·  Limited companies (a limited company is a body owned by shareholders, set up to do business)

·  Co-operatives (groups of people ‘ clubbing’ together for a specific purpose)

·  Franchise operations (where a trader can ‘ buy’ a name and set up a business which is already established and used by other independent operators)

Privatisation is a process whereby public sector operations have been ‘ sold off ‘ by the Government, in order to raise money, to private sector shareholders.

Charities - the voluntary sector

Charities are independent bodies in what is known as the voluntary sector. They include registered ‘ do good’ charities such as Oxfam and Scope, and educational and arts organisations such as many independent schools and the National Trust.

Private Sector Businesses

1.  Sole Trader

A sole trader is an individual trading in his or her name, or under a suitable trading name.

People set up in business for a number of reasons:

·  Redundancy

·  Dissatisfaction with their present job

·  Developing a hobby or interest into a business.

·  The majority of people setting up in this way do so on their own and become a sole trader.

Unlimited Liability

·  In law a sole trader is an individual who is solely liable for all the debts of the business.

·  If the business fails the sole trader will have to repay all its debts, and may have to sell his or her personal assets (house, car, and personal belongings) to pay off those debts.

·  The sole trader may be taken to Court and be made bankrupt if the debts are not repaid.

Advantages

There are a number of advantages of being a sole trader:

·  Freedom - you are your own boss

·  Simplicity - there are no legal formalities required before you can start trading

·  Book- keeping should be less complex

·  Savings on fees - there are none of the legal costs of drawing up partnership agreements or limited company documentation

Disadvantages

There are also disadvantages of being a sole trader:

·  Risk - you are on your own, with no-one to share the responsibilities of running the business

·  Time - you may need to work long hours to meet tight deadlines

·  Expertise - you may have limited skills in areas such as finance

·  Vulnerability - if you are ill, you may have no cover to enable the business to carry on

Setting up in business as a sole trader involves total commitment in terms of:

·  Capital

·  Time

·  Risk involved.

If you are starting your business with other people or need to raise substantial capital, you may consider establishing a partnership or a limited company.

2.  Partnership

A partnership is a group of individuals working together in business with a view to making a profit.

Unlimited liability

The essential legal point about a partnership is that each partner is liable for the whole debt of the partnership. If one partner runs up a big debt, each of the other partners will be liable for all of it. A partner therefore, like a sole trader has unlimited liability for the business.

Partnership Agreement

·  Partnerships are regulated by the Partnership Act 1890.

·  Most partnerships will operate according to the terms of a Partnership Agreement, a document usually drawn up by a solicitor, and known as the Articles of Partnership or Deed of Partnership (a more formal document).

·  This document will set out:

·  The amount of capital contributed (money invested) by each partner

·  Partners’ voting rights

·  The sharing out of profit (and losses) by the partners

·  The procedure in the case of partnership disputes (these are unfortunately common)

·  The procedures for new partners coming in and old partners retiring (or being asked to retire)

·  A partnership does not have to draw up a Partnership Agreement.

·  In the absence of a written agreement, the Partnership Act 1890 sets out certain terms and conditions relating to partners’ rights and obligations. If there were a dispute, these terms would be recognised in a court of law.

Advantages of a Partnership

·  There is the potential to raise more capital than a sole trader is able to - there are more individuals to contribute funds

·  There is more potential for expertise and specialisation - one partner may be a technical expert, another a good salesperson, another a financial expert, and so on

·  There is cover for holidays and sickness

·  A partnership does not have to make its accounts available to the public

Disadvantages of a Partnership

·  Unlimited liability - each partner is liable for the whole debt of the partnership, to the extent that he or she may be made personally bankrupt if the business fails

·  Each partner is also liable for the business deals of the other partners

·  Disagreements can and do occur amongst partners - occasionally this can lead to the break-up of the partnership and the business

3.  Limited company

A limited company is a separate legal body, which is owned by shareholders, run by directors.

Limited Liability

A limited company has a legal identity separate from its owners. The owners - the shareholders - are not personally liable for the business debts, but have limited liability: the most they can lose is the money they have invested in the company.

Legal requirements

·  A company is managed by directors appointed by the shareholders (also known as members).

·  A company must be registered at a central office known as Companies House.

·  The company must send an annual return and financial statements each year to Companies House.

The documentation that Limited Companies is required to complete is:

Memorandum of Association

·  The Memorandum is the ‘constitution’ of the company and sets out the company’s name, location, its share capital, and defines in an ‘Objects Clause’ what the company can and cannot do, often in general terms such as “ a general trading company “, which means it can do anything legal.

Articles of Association

·  The Articles are effectively the ‘rulebook’ of the company, governing the conduct of directors, calling of meetings, and other administrative matters.

Certificate of Incorporation

·  The ‘birth certificate’ of a company - is a single sheet of paper issued by Companies House stating when the company was formed, what its name is, and giving it a number.

Advantages of limited companies

The advantages of forming a limited company are:

·  Members (shareholders) have limited liability for the company’s debts

·  Capital can be raised more easily, and in some cases, from the public on the Stock Exchange

·  Expansion is made easier, because of the availability of finance

·  Status- for the employees and the directors

Disadvantages of limited companies

The disadvantages are:

·  The expense of setting up a limited company (solicitors’ and accountants’ fees)

·  Paperwork - the legal necessity to send an annual return and financial statements to Companies House

·  The accounts have by law to be audited, incurring more accountants’ fees

Private Companies and Public Companies

It should be noted that a limited company could be referred to as either

·  A private limited company (abbreviated to Ltd.), or

·  A public limited company (abbreviated to plc)

A private company may, however, become and trade as a public limited company if it has:

·  A minimum of two directors (a private limited company needs only one)

·  A share capital of at least £50,000

·  A Trading Certificate issued by Companies House

·  The words ‘public limited company’ or ‘plc’ in its name

A public limited company can offer its shares for sale on the Stock Market in order to raise finance, but not all plc’s take this step.

4.  Co-operatives

A co-operative is a general term applied to two types of trading body:

·  A retail Co-operative Society - a specific form of trading body set up under the terms of the Industrial and Provident Societies Acts

·  Co-operative - a group of people ‘clubbing’ together to produce goods or to provide a service

4.a Retail Co-operative Societies

·  Co-operative Societies date back to 1844 when a group of twenty eight Rochdale weavers, suffering from the effects of high food prices and low pay, set up a society to buy food wholesale, i.e. at the same price as it was sold to the shops.

·  This food was then sold to the members at prices lower than the shop prices, and the profits distributed to the members in what was known as a dividend, the level of which depended on the amount of food they had bought.

·  These self-help co-operatives grew in number until in 1990 there were around eighty in number.

·  The best-known example of a retail co-operative is what is known as ‘ the Co-op’, which now operates as the Leo’s supermarket chain.

·  The Co-op was founded as the Co-operative Wholesale Society in 1863.

·  A Co-operative Society is a separate legal body set up under the Industrial and Provident Societies Acts (unlike a company, which is set up under the Companies Acts).

·  The retail Co-operatives, which have traditionally been regional, are declining in number, partly because of merger and rationalisation and partly because of the intense competition in the retail sector from public companies such as Tesco, Sainsbury and Asda.

4.b Co-operative Ventures

·  The term co-operative also applies more loosely to c-operative ventures which are not registered as Co-operative Societies under the Industrial and Provident Societies Acts.

·  There are around two thousand co-operatives which fulfil a number of different functions:

the trading co-operative

·  Groups of individuals, such as farmers, who do not have the resources in terms of capital and time to carry out their own promotion, selling and distribution, may ‘club’ together to store and distribute their produce. They may also set up co-operative ventures to purchase machinery and equipment.

the workers co-operative

·  A worker’s co-operative may often be found where the management of a business is not succeeding and a shutdown is proposed. The ‘workers’ step in, with the consent of the management, and take over the ownership and running of the business with the aim of ‘making a go of it’ and at the same time safeguarding their jobs.

5.  Franchises

A franchise is an operation which involves two separate parties:

·  The franchisor, a person who has developed a certain line of business, such
as clothes retailing, hamburgers, drain clearing, and has made the trading name
well-known

·  The franchisee, a person who buys the right to trade under the well-trading
name in a particular locality, and in return for his or her investment receives training and equipment

·  The franchise system is a growing business sector in the UK.

·  Franchises are used in many different sizes of business: British Rail is franchising its passenger services, retail organisations such as Benetton operate franchises within department stores.

The Public Sector

These are organisations, which are directly or indirectly controlled by the government. The Government owns and controls certain areas of activity for a number of different reasons:

·  The area provides goods and services for the good of the community, for example, health, education, transport

·  The area has to be controlled by the Government because it is supervisory in nature, for example Customs & Excise, the Inland Revenue , the Armed Forced, the Police, the Bank of England

1.  Public Corporations

·  Public corporations are bodies established by Act of Parliament, and owned and financed by the State.

·  Examples include the Post Office, British Rail, the Bank of England and the BBC.

·  Some public corporations are known as nationalised industries because at one time they were in the private sector, and were then nationalised (taken into public control) by Act of Parliament.

·  Public corporations are run by a Board of Management headed by a chairperson appointed by the Government. The public corporation is directly answerable to a Government Minister and also to a select committee of MPs.

·  A public corporation will submit its annual report to the appropriate minister, who will then report to Parliament. The proceedings are made public and are usually reported in the media.

2.  Central Government Enterprises

These fall into two categories:

·  An enterprise run as part of a government department - a Government Minister has ultimate responsibility, and the day-to-day operations are run by Civil Servants; the Inland Revenue (the ‘taxman’) is a well-known example

·  A public limited company in the private sector in which the Government has a shareholding

3.  Local Authority Enterprise

Local Authority is a term applied to local governing councils which operate both in the county areas and also in urban areas. In the county areas the Local Authority is traditionally structured in three tiers:

·  the County Council

·  the Borough or District Councils

·  the Parish Councils

In the urban areas only one level of council exists: in London there are separate Borough Councils (such as Brent or Westminster) and in other urban areas there are Metropolitan Borough Councils (such as Birmingham or Liverpool). These may be reformed into single ’unitary’ authorities.

Local Authorities taken as a whole have a wide range of services to administer. These include education, environmental health, planning, refuse collection, social services, transport, fire services, libraries and recreational facilities. They finance these from three main sources: